Macroeconomic policy can both be a problem and a solution in economic fluctuations. Explain.

Macroeconomic policy, which is a term to describe fiscal policy and monetary policy, can often be a problem during economic fluctuations. Greece is a good example of this. As a result of their sovereign debt crisis, they have been forced to contract government spending and raise taxes. At a time when the global economy was facing a downturn, this contracted aggregate demand, shifting it downwards, because government spending is a component of AD. This cut in public spending reduced public sector employment and a rise in taxes reduced consumer spending power. The result was a further drop in AD as consumption falls, a typically disastrous effect due to 70% of AD being attributed to consumption. On the other hand, Macroeconomic policy can be very powerful in the recovery of an economy. It has the ability to counteract effects of other demand-side shocks. For instance, during the same 2008 financial crisis, countries like the United Kingdom and United States implemented expansionary monetary policy which involved decreasing interest rates as well as implementing quantitative easing. Both of these increase consumption for both firms and households, increasing consumption and investment of AD and resulted in an expansion of the economy, by shifting the AD curve outwards.